Starjournal Quotation Nils, Friewald, Hennessy, Christopher, Jankowitsch, Rainer. 2016. Secondary Market Liquidity and Security Design: Theory and Evidence from ABS Markets. Review of Financial Studies 29 (5), 1254-1290.




We develop and empirically test a theory of optimal security design under adverse selection accounting for strategic trading by uninformed investors who will liquidate a security in secondary markets only if their idiosyncratic carrying cost exceeds the security's expected trading loss. Such investors demand primary market discounts equaling expected carrying costs borne plus trading losses incurred. Issuers minimize the total illiquidity discount by splitting cash flow into tranched debt claims with liquidity predicted to increase with seniority, while the optimal number of tranches increases with underlying cash flow risk. Empirical tests confirm our model predictions.


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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Review of Financial Studies
Citation Index SSCI
WU Journalrating 2009 A+
Starjournal Y
Language English
Title Secondary Market Liquidity and Security Design: Theory and Evidence from ABS Markets
Volume 29
Number 5
Year 2016
Page from 1254
Page to 1290
Reviewed? Y
JEL D82, G12, G23


Jankowitsch, Rainer (Details)
Hennessy, Christopher (London Business School, United Kingdom)
Nils, Friewald (Norwegian School of Economics, Norway)
Institute for Finance, Banking and Insurance IN (Details)
Research areas (Ă–STAT Classification 'Statistik Austria')
5305 Bank management (Details)
5307 Business and management economics (Details)
5360 Financial mathematics (Details)
5361 Financial management (Details)
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